Abstract

http://ssrn.com/abstract=394180
 
 

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Mexico's Integration into the North American Capital Market


Michael Adler


Columbia Business School - Finance and Economics

Rong Qi


ING Aeltus Asset Management

December 25, 2002

Emerging Markets Review, Vol. 4, pp. 91-120, 2003

Abstract:     
We explore a model of time varying regional market integration that includes three factors, for the North American equity market, the local Mexican equity market and the peso/dollar exchange rate. We argue that a useful instrument for the degree of integration is the sovereign yield spread. Applying our methodology to Mexico over the 1991-2002 period, we show that the degree of market integration was higher at the end of the period than at the beginning but that it exhibited wide swings that were related to both global as well as local events. We also discover that Mexico's currency risk is priced. Further, the currency returns process reveals strongly significant asymmetric volatility that is strongly related to the asymmetric volatility of the Mexican equity market returns process. A plausible reason for these results is that currency devaluations in emerging markets like Mexico can cause default-risk crises in local banking systems that mismatch local-currency assets and hard currency liabilities, whereas appreciations produce no such problems. Devaluations that destabilize banking systems are therefore more likely than appreciations to increase the volatilities of both the currency's and the equity market's returns.

Number of Pages in PDF File: 30

JEL Classification: C3, F3, G1

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Date posted: June 2, 2003 ; Last revised: June 14, 2011

Suggested Citation

Adler, Michael and Qi, Rong, Mexico's Integration into the North American Capital Market (December 25, 2002). Emerging Markets Review, Vol. 4, pp. 91-120, 2003. Available at SSRN: http://ssrn.com/abstract=394180

Contact Information

Michael Adler (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

Rong Qi
ING Aeltus Asset Management ( email )
10 State House Square
Hartford, CT 06457
United States
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